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RSTV: THE BIG PICTURE – PRIVATISATION OF PUBLIC SECTOR ENTERPRISES

RSTV


Introduction:

Union Finance Minister Nirmala Sitharaman recently announced major reforms for Public Sector Undertakings, as a result of which many sectors are likely to see large-scale consolidation and divestment of State-run firms. The government will soon announce a new PSU policy, which will focus on privatising PSUs in non-strategic sectors based on feasibility. The policy will, in parallel, specify certain strategic sectors in which the “presence of PSEs in public interest” will be mandatory.

Privatisation:

  • It means migration from the Public to Private Sector through the transfer of ownership, management and control.
  • In India, privatisation is aimed at improving the inflow of Foreign Direct Investment (FDI) or investment in sectors that require technological advancements, thereby directly providing a boost to Economy.
  • Govt has now announced that all PSUs in non-strategic sectors will be privatized, while in the strategic sector, there will be only one to maximum 4 PSUs fully owned by Govt.
  • Rest every PSU in India will be privatized.
  • Objective behind PSU Privatisation
    • Minimise the administrative cost of the Central Government
    • Boost the CPSE Disinvestment programme of the central government

Disinvestment:

  • Disinvestment, or divestment, refers to the act of a business or government selling or liquidating an asset or subsidiary or the process of dilution of a government’s stake in a PSU (Public Sector Undertaking).
  • Disinvestment indicates only a partial dilution of control by the Govt and still retaining overall ownership of a particular enterprise, whereas privatisation for all purposes signify relinquishing the entire ownership in favour of private parties.

Privatization’s experience:

  • India’s attempt at dismantling the PSUs over the years has seen little success, with the last big-ticket privatization taking place between 1999 and 2004.
  • Since then, most governments have tried to disinvest and privatize. But this has led only to incremental progress, with no big-ticket privatization taking place since then. A good example is Air India, the national carrier that the Centre has repeatedly tried to privatize. However, it has met with limited success.
  • Stiff opposition from unions, concerns of allegations of graft and criticism of the sale of “family silver” act as major hurdles to the drive for privatization.
  • A good example of privatization and its effect on the enterprise is Hindustan Zinc. The Atal Bihari Vajpayee-led BJP government sold 45% of Hindustan Zinc for ₹769 crore in 2002. The 30% stake the government retained was valued at over ₹20,000 crore. The company became the world’s second-largest zinc-lead miner and one of the top 10 silver producers. Management change and privatization can thus raise shareholder wealth through improved efficiency.

What are Central Public Sector Enterprises (PSEs) or Public Sector Units (PSUs)?

  • Companies in which Central Government or a CPSE holds 51% stake or direct holding are known as Central public sector enterprises (CPSEs) or Public Sector Units (PSUs).
  • In India, CPSEs hold key position in sectors like Petroleum, Banks, Coal, Power, Steel and Mining such as SBI in Banking sector; LIC in life insurance; Coal India Limited in coal sector and others.

What’s the upshot of selling these public sector firms?

  • Most PSUs are making losses and are funded by the largesse of taxpayers. The public resources spent on them could be better utilized elsewhere, especially for development.
  • Selling them can also yield non-tax revenue, which could be used to augment public infrastructure. Moreover, their turnaround by the private sector can generate tax revenue for the government.

But why not disinvest, rather than privatize?

  • The Centre has had some success with disinvestment over the years. Of late, most of the disinvestments are funded by the Life Insurance Corporation of India.
  • The problem in disinvestment is that it does not ensure a change in management of the enterprise. To make PSUs efficient, there is a need to bring in private management that runs it with the aim of maximizing profit.
  • Thus, privatization is important and disinvestment a second-best alternative that yields revenues for the Centre, but does not improve the condition of the enterprise.

Challenges:

  • Loss making units don’t attract investment so easily.
  • Government has mostly used it for fiscal reasons rather than growth objectives.
  • Most firms are not clear with their legal land rights.
  • Process is not favoured socially as it is against the interests of socially disadvantaged people.
  • Over the years the policy has increasingly become a tool to raise resources to cover the fiscal deficit with little focus on market discipline or strategic objective.
  • Sometimes with the emergence of private monopolies consumer welfare will be reduced.
  • Mere change of ownership from public to private does not ensure higher efficiency and productivity.
  • It may lead to retrenchment of workers who will be deprived of the means of their livelihood.
  • Private sector governed as they are by profit motive has a tendency to use capital intensive techniques which will worsen unemployment problem in India.